FBI fears Bitcoin’s popularity with criminals

There's reportedly $35 million-44 million worth of Bitcoin in circulation.

The FBI sees the anonymous Bitcoin payment network as an alarming haven for money laundering and other criminal activity—including as a tool for hackers to rip off fellow Bitcoin users.

That’s according to a new FBI internal report that leaked to the Internet this week, which expresses concern about the difficulty of tracking the identity of anonymous Bitcoin users, while also unintentionally providing tips for Bitcoin users to remain more anonymous.

In the document, the FBI notes that because Bitcoin combines cryptography and a peer-to-peer architecture to avoid a central authority, contrary to how digital currencies such as eGold and WebMoney operated, law enforcement agencies have more difficulty identifying suspicious users and obtaining transaction records.

Though the Bureau expresses confidence that authorities can still snag some suspects who use third-party Bitcoin services that require customers to submit valid identification or banking information in order to convert their Bitcoins into real-world currencies, it notes that using offshore services that don’t require valid IDs can thwart tracking by law enforcement.

Bitcoin is an online currency that allows buyers and sellers to exchange money anonymously. To “cash-out,” the recipient has to convert the digital cash into US dollars, British pounds or another established currency. Bitcoin is used as a legitimate form of payment by numerous online retailers selling traditional consumer goods, such as clothing and music. But it’s also used by underground sites, such as Silk Road, for the sale of illegal narcotics.

To generate Bitcoins, a user has to download and install a free Bitcoin software client to their computer. The software generates Bitcoin addresses or accounts—a unique 36-character string of numbers and letters—to receive Bitcoin payments. The currency is stored on the user’s computer in a virtual “wallet.” Users can create as many addresses or accounts as they want.

To send Bitcoins, the sender enters the recipient’s address as well as the amount of Bitcoins they want to transfer to the address. The sender’s computer digitally signs the transaction and sends the information to the peer-to-peer Bitcoin network, which validates the transaction in a matter of minutes and releases the coins for the receiver to spend or convert.

The conversion value fluctuates with supply and demand and the trust in the currency. As of last month, there were more than 8.8 million Bitcoins in circulation, according to Bitcoin, with a value of about $4 and $5 per Bitcoin. The FBI estimates in its report that the Bitcoin economy was worth between $35 million-$44 million.

It’s easy to see the attraction for criminals.

“If Bitcoin stabilizes and grows in popularity, it will become an increasingly useful tool for various illegal activities beyond the cyber realm,” the FBI writes in the report. “For instance, child pornography and Internet gambling are illegal activities already taking place on the Internet which require simple payment transfers. Bitcoin might logically attract money launderers, human traffickers, terrorists, and other criminals who avoid traditional financial systems by using the Internet to conduct global monetary transfers.”

Bitcoin transactions are published online, but the only information that identifies a Bitcoin user is a Bitcoin address, making the transaction anonymous. Or at least somewhat anonymous. As the FBI points out in its report, the anonymity depends on the actions of the user.

Since the IP address of the user is published online with Bitcoin transactions, a user who doesn’t use a proxy to anonymize his or her IP address is at risk of being identified by authorities who are able to trace the address to a physical location or specific user.

And a report published by researchers in Ireland last year showed how, by analyzing publicly available Bitcoin information (such as transaction records and user postings of public-private keys) and combining that with less public information that might be available to law enforcement agencies, such as bank account information or shipping addresses, the real identity of users might be ascertained.

But the FBI helpfully lists several ways that Bitcoin users can protect their anonymity.

Create and use a new Bitcoin address for each incoming payment.

Route all Bitcoin traffic through an anonymizer.

Combine the balance of old Bitcoin addresses into a new address to make new payments.

Use a specialized money laundering service.

Use a third-party eWallet service to consolidate addresses. Some third-party services offer the option of creating an eWallet that allows users to consolidate many Bitcoin addresses and store and easily access their Bitcoins from any device.

Individuals can create Bitcoin clients to seamlessly increase anonymity (such as allowing users to choose which Bitcoin addresses to make payments from), making it easier for non-technically savvy users to anonymize their Bitcoin transactions.

But the bigger risk for crooks and others who use Bitcoin might not come from law enforcement identifying them, but from hackers who are out to rob their virtual Bitcoin wallets dry.

Last year, computer security researchers discovered malware called “Infostealer.Coinbit” that was designed specifically to steal Bitcoins from virtual Bitcoin wallets and transfer them to a server in Poland.

One Bitcoin user complained in a Bitcoin forum that 25,000 Bitcoins had been stolen from an unencrypted Bitcoin wallet on his computer. Since the exchange rate for Bitcoins at the time was about $20 per Bitcoin, the value of his loss at the time was about $500,000. A popular Web hosting company called Linode was also infiltrated by an attacker looking to pilfer Bitcoins.

And there have also been cases of hackers attempting to use “botnets” to generate Bitcoins on compromised machines.

According to the FBI, quoting an anonymous “reliable source,” last May someone compromised a cluster of machines at an unidentified Midwestern university in an attempt to manufacture Bitcoins. The report doesn’t provide any additional details about the incident.

The ability to privately hold and exchange currency is a crucial safeguard against an ever-growing surveillance society as cash gets phased out. The main reason money is laundered is because of illegitimate laws against drugs and prostitution. Those laws should not exist, and that privately payments route around these laws is a good thing.

There are also costs to private payments: for example, there is a greater possibility of evasion of income and sales taxes, but i doubt income tax is an issue as it's hard to keep a secreet among many people. But the FBI is not worrying about these costs; instead, it doesn't want to lose its power to surveill on everything or for it to have to do proper investigations.

@Solomon I think it isn't hard for the "surveillance" society to paint a dark picture on the use of bitcoins, their work is being cut out for them as all of the recent news about bitcoins are scaring off potential average users. This isn't a matter of governments being scared and trying to discourage bitcoin use (although it's obvious which side they fall on) they just have to let this play out and let them do all the damage.

Yeah, and cash is popular with criminals too. If you are doing things the government doesn't like, being difficult to trace is advantageous. Surprise, surprise, However, I think the anonymity is definitely worth the cost.

The ability to privately hold and exchange currency is a crucial safeguard against an ever-growing surveillance society as cash gets phased out. The main reason money is laundered is because of illegitimate laws against drugs and prostitution. Those laws should not exist, and that privately payments route around these laws is a good thing.

Money laundering also occurs because of extortion, theft, bribery, and trafficking. You can't just say money laundering is acceptable, just because it skirts around laws you personally don't agree with.

It's clear how Bitcoins retain value (scarcity), but it's not clear as to how they attain value. I read the wiki article and their FAQ and am still unsure. Is the equity of a single bitcoin tied in the processing required to "unlock" a block?? What sort of equity is that? It's not tangible at all.

Even paper money (at some point) was tangibly correlated to some kind of capital (gold, land, cattle), etc. Is Bitcoin's capital in power (electricity) consumed? Can someone please explain?

Money laundering also occurs because of extortion, theft, bribery, and trafficking. You can't just say money laundering is acceptable, just because it skirts around laws you personally don't agree with.

I also noted that the ability to make private payments has costs. But many of these crimes also leave other evidence, and thus can be tracked down via other means. Were these crimes much more prevalent before electronic currency, and if so, is their reduction a result of electronic currency as opposed to causes of the generally falling crime rate?

The ability to privately hold and exchange currency is a crucial safeguard against an ever-growing surveillance society as cash gets phased out. The main reason money is laundered is because of illegitimate laws against drugs and prostitution. Those laws should not exist, and that privately payments route around these laws is a good thing.

Money laundering also occurs because of extortion, theft, bribery, and trafficking. You can't just say money laundering is acceptable, just because it skirts around laws you personally don't agree with.

Why not? The generation of millennials seems to have little regard for law, religious belief, or work ethic...true anarchy is the only way forward. [/sarcasm]

Laws are societal norms created by a group of like-minded people and upheld within that group's jurisdiction (i.e. a country). If you don't agree with that group, then go find another country of people that think like you instead of trying to claim moral superiority of the idea of wanton prostitution and drug use.

It's clear how Bitcoins retain value (scarcity), but it's not clear as to how they attain value. I read the wiki article and their FAQ and am still unsure. Is the equity of a single bitcoin tied in the processing required to "unlock" a block?? What sort of equity is that? It's not tangible at all.

Even paper money (at some point) was tangibly correlated to some kind of capital (gold, land, cattle), etc. Is Bitcoin's capital in power (electricity) consumed? Can someone please explain?

I'm not a 100% but I am pretty sure its because of the computing power reqto generate the coins. Each coin has an relasionship to each other that is difficult to find that is why bitcoin have value.

It's clear how Bitcoins retain value (scarcity), but it's not clear as to how they attain value.

That's like saying: It's clear how the USD retains value (scarcity) -- the actions of the US Government -- but it's not clear how the USD attains value.

Bitcoin has value because, to put the point rather crudely, (some) people treat it as having value. That is, people accept it as a unit of exchange for goods and services. (The same basic point applies to the question 'why does the USD have value'.)

It's clear how Bitcoins retain value (scarcity), but it's not clear as to how they attain value. I read the wiki article and their FAQ and am still unsure. Is the equity of a single bitcoin tied in the processing required to "unlock" a block?? What sort of equity is that? It's not tangible at all.

Even paper money (at some point) was tangibly correlated to some kind of capital (gold, land, cattle), etc. Is Bitcoin's capital in power (electricity) consumed? Can someone please explain?

The only true measure of the value of a BitCoin is the amount of money someone is willing to pay for it using your currency of choice. They have no intrinsic value themselves. In the same way that a stock is only worth what someone is willing to buy it for.

It's clear how Bitcoins retain value (scarcity), but it's not clear as to how they attain value. I read the wiki article and their FAQ and am still unsure. Is the equity of a single bitcoin tied in the processing required to "unlock" a block?? What sort of equity is that? It's not tangible at all.

Even paper money (at some point) was tangibly correlated to some kind of capital (gold, land, cattle), etc. Is Bitcoin's capital in power (electricity) consumed? Can someone please explain?

The lower bound for a bit coin is the electricity used to generate the bit coin. However, their current value far outstrips that, increased by sacristy. What really assigns a bit coin's value is the ability in the user's local market to purchase other goods and services. This value is set by the market and maintained by the bitcoin exchanges.

Unlike fiat currency, bitcoins have a very stable generation function meaning that they are free of government influence. For instance, the M2 monetary rate is up over 9%, meaning the Fed is printing money like crazy to paper over the economic crisis. This then works against anyone who saved anything. Contrast that to bit coins that will predictably generate coins, plus that function is terminal. Bitcoin has a fixed maximum number of coins in the economy. But unlike traditional currencies, you can divide bitcoins much, much smaller than 1/100th. (A penny) So when bitcoins run out but the bit coin economy grows, things will become "cheaper" for anyone holding bit older coins. Meanwhile bitcoins, while being divided more and more will still be able to fetch the same thing in local, real-world markets.

The only true measure of the value of a BitCoin is the amount of money someone is willing to pay for it using your currency of choice. They have no intrinsic value themselves. In the same way that a stock is only worth what someone is willing to buy it for.

Or, as I said above, in the same way that the USD is only worth what someone is willing to give in exchange for it (either in the form of other mediums of exchange, such as the Euro, or in actual goods and services.)

Why not? The generation of millennials seems to have little regard for law, religious belief, or work ethic...true anarchy is the only way forward. [/sarcasm]

And so the preceding generations, the ones in control of government, the newsmedia, and big business, they have more regard for those things, yes?

Get over yourself.

The sense of self-entitlement and instant-gratification that pervades the latest crop of college grads is frightening. While previous generations have always had their "rebels" if you will, today this is becoming the norm.

I believe strongly that the greatest attribute of America has always been her work ethic, and unfortunately I've seen many examples of the newest workforce generation sorely lacking it. In far greater numbers than any previous generation.

Why not? The generation of millennials seems to have little regard for law, religious belief, or work ethic...true anarchy is the only way forward. [/sarcasm]

And so the preceding generations, the ones in control of government, the newsmedia, and big business, they have more regard for those things, yes?

Get over yourself.

The sense of self-entitlement and instant-gratification that pervades the latest crop of college grads is frightening. While previous generations have always had their "rebels" if you will, today this is becoming the norm.

I believe strongly that the greatest attribute of America has always been her work ethic, and unfortunately I've seen many examples of the newest workforce generation sorely lacking it. In far greater numbers than any previous generation.

Darn kids with your loud rock-n-roll and rap music! Get off my lawn and get a job!

Haha, I'm just joking around before you get super offended and write a long reply about how the new generation doesn't respect authority.

It's clear how Bitcoins retain value (scarcity), but it's not clear as to how they attain value. I read the wiki article and their FAQ and am still unsure. Is the equity of a single bitcoin tied in the processing required to "unlock" a block?? What sort of equity is that? It's not tangible at all.

Even paper money (at some point) was tangibly correlated to some kind of capital (gold, land, cattle), etc. Is Bitcoin's capital in power (electricity) consumed? Can someone please explain?

Bitcoin has value primarily as a means of anonymously exchanging currency. If you hold bitcoins for an extended period, you are at a large risk, because bitcoin currency isnt underwritten by a powerful sponsor.

Something only has value in proportion to how much people want it, and this is weakly correlated to utility or 'capital'.

Your examples of gold, land and cattle are instructive.

Gold acquired value, because it was a relatively scarce, easily worked and decorative metal. It doesn't have many uses beyond jewellery. You cant eat it, and there isnt much useful you can make from it. You would think Iron or Steel would have higher value, and there may well have been times and places where this was true.

Land has value, because it is finite, and because it is needed for houses and such. That said, land only has value in proportion to how much people want it. A hectare of Sahara desert has orders of magnitude less value than a hectare in downtown Manhattan. This probably wasn't true 1000 years ago.

Cattle have value as food animals and work animals. They have next to no value in an industrialised vegetarian society compared to a meat-eating pre-industrial society.

Gold acquired value, because it was a relatively scarce, easily worked and decorative metal. It doesn't have many uses beyond jewellery. You cant eat it, and there isnt much useful you can make from it. You would think Iron or Steel would have higher value, and there may well have been times and places where this was true.

1. I think it's helpful to look in some detail at the actual linked article (paying attention to its weird syntax).

<quote>"The FBI assesses with low confidence, based on current user and vendor acceptance,that malicious actors will exploit Bitcoin to launder money. This assessment is based onobserved criminal activities, investigations, and prosecutions of individuals exploiting othervirtual currencies, such as e-Gold and WebMoney. A lack of current reporting specific toBitcoin restricts the confidence level."</quote>

IOW, the FBI is is not at all certain that criminals will use bitcoin to launder money.

<quote>"Even though there is no central Bitcoin server to compromise, the FBI assesses withhigh confidence, based on reliable industry and FBI reporting, that criminals intending to stealbitcoins can target and exploit third-party bitcoin services and an individual’s Bitcoin wallet.Malicious actors can compromise personal computers and accounts using malware and hackingtechniques to steal users’ bitcoins and use botnets to generate bitcoins."</quote>

IOW, the FBI is very confident that criminals will try to steal bitcoins from bitcoin holders and third party bitcoin services.

So the FBI's main concern about bitcoin seems to be that people will steal them, not that people will use it to launder money.

(However, they do acknowledge that if bitcoin becomes more popular, tracking problems may increase).

It's clear how Bitcoins retain value (scarcity), but it's not clear as to how they attain value. I read the wiki article and their FAQ and am still unsure. Is the equity of a single bitcoin tied in the processing required to "unlock" a block?? What sort of equity is that? It's not tangible at all.

Even paper money (at some point) was tangibly correlated to some kind of capital (gold, land, cattle), etc. Is Bitcoin's capital in power (electricity) consumed? Can someone please explain?

The only true measure of the value of a BitCoin is the amount of money someone is willing to pay for it using your currency of choice. They have no intrinsic value themselves. In the same way that a stock is only worth what someone is willing to buy it for.

And by the same notion, money, be it physical coin, paper or (these days digital) numbers in a bank account, only holds value in that people are willing to accept it as part of a exchange for something else that you see as valuable.

"Laws are societal norms created by a group of like-minded people and upheld within that group's jurisdiction (i.e. a country). If you don't agree withthat group, then go find another country of people that think like you instead of trying to claim moral superiority of the idea of wanton prostitution"

The same argument is valid when applied to Muslim nations enforcing laws mandating the execution of apostates.

You could equally argue that people who defend wanton apostasy from a state religion should find another country instead of claiming moral superiority of the idea of wanton heresy.

Law is only a matter of who has the biggest gun. There is no inherent truth or moral superiority in dearguing that anyone who defend lawbreaking should find another country.

The sense of self-entitlement and instant-gratification that pervades the latest crop of college grads is frightening. While previous generations have always had their "rebels" if you will, today this is becoming the norm.

I believe strongly that the greatest attribute of America has always been her work ethic, and unfortunately I've seen many examples of the newest workforce generation sorely lacking it. In far greater numbers than any previous generation.

Self-entitlement, instant-gratification, and lack of respect for other people's lawns...

Welcome to the future!

(not a "millenial" by a few decades)

edit: Seriously though, I think it's human nature to normalize things. Likewise, we work hard and endure stress out of necessity. During times of hardship, we do what we need to do. During times of abundance, people get lazier. It's a broad generalization as some of the most ingenious and entrepreneurial ideas I've heard come from so-called "millenials" and there have always been lazy bums. If the expectation of plenty is a naive norm nowadays, don't worry. History moves slowly and generations are short so we only really normalize that which is the case during our own lifespans.

It's clear how Bitcoins retain value (scarcity), but it's not clear as to how they attain value.

That's like saying: It's clear how the USD retains value (scarcity) -- the actions of the US Government -- but it's not clear how the USD attains value.

Bitcoin has value because, to put the point rather crudely, (some) people treat it as having value. That is, people accept it as a unit of exchange for goods and services. (The same basic point applies to the question 'why does the USD have value'.)

Different, though, because within the United States people are required to treat the dollar as having value. Within some limitations, obviously, but a dollar must be accepted to satisfy a debt within the U.S., and in most other countries official currency is treated similarly. Whereas if you try to pay me back with bitcoins, I can tell you to hit the road.

Somebody mentioned stock. Stock at least theoretically represents partial ownership in a company, and that company will have assets, revenue streams, etc. While that company can go bankrupt and investors can be left with nothing, in general stock has value because it is backed by property of value, and an organization with the ability to create further value.

The sense of self-entitlement and instant-gratification that pervades the latest crop of college grads is frightening. While previous generations have always had their "rebels" if you will, today this is becoming the norm.

I believe strongly that the greatest attribute of America has always been her work ethic, and unfortunately I've seen many examples of the newest workforce generation sorely lacking it. In far greater numbers than any previous generation.

Self-entitlement, instant-gratification, and lack of respect for other people's lawns...

Welcome to the future!

(not a "millenial" by a few decades)

edit: Seriously though, I think it's human nature to normalize things. Likewise, we work hard and endure stress out of necessity. During times of hardship, we do what we need to do. During times of abundance, people get lazier. It's a broad generalization as some of the most ingenious and entrepreneurial ideas I've heard come from so-called "millenials" and there have always been lazy bums. If the expectation of plenty is a naive norm nowadays, don't worry. History moves slowly and generations are short so we only really normalize that which is the case during our own lifespans.

I believe it was the same in the later years of the Roman Empire, where idolatry and apathy were commonplace and people were more interested in the entertainment and self-indulgence than they were concerned about the viability and strength of the republic. Which is what is going on right now in this country.

Why not? The generation of millennials seems to have little regard for law, religious belief, or work ethic...true anarchy is the only way forward. [/sarcasm]

And so the preceding generations, the ones in control of government, the newsmedia, and big business, they have more regard for those things, yes?

Get over yourself.

The sense of self-entitlement and instant-gratification that pervades the latest crop of college grads is frightening. While previous generations have always had their "rebels" if you will, today this is becoming the norm.

I believe strongly that the greatest attribute of America has always been her work ethic, and unfortunately I've seen many examples of the newest workforce generation sorely lacking it. In far greater numbers than any previous generation.

Modern economics is basically educating people to be sociopaths by way of game theory.

The sense of self-entitlement and instant-gratification that pervades the latest crop of college grads is frightening. While previous generations have always had their "rebels" if you will, today this is becoming the norm.

I believe strongly that the greatest attribute of America has always been her work ethic, and unfortunately I've seen many examples of the newest workforce generation sorely lacking it. In far greater numbers than any previous generation.

Self-entitlement, instant-gratification, and lack of respect for other people's lawns...

Welcome to the future!

(not a "millenial" by a few decades)

edit: Seriously though, I think it's human nature to normalize things. Likewise, we work hard and endure stress out of necessity. During times of hardship, we do what we need to do. During times of abundance, people get lazier. It's a broad generalization as some of the most ingenious and entrepreneurial ideas I've heard come from so-called "millenials" and there have always been lazy bums. If the expectation of plenty is a naive norm nowadays, don't worry. History moves slowly and generations are short so we only really normalize that which is the case during our own lifespans.

I believe it was the same in the later years of the Roman Empire, where idolatry and apathy were commonplace and people were more interested in the entertainment and self-indulgence than they were concerned about the viability and strength of the republic. Which is what is going on right now in this country.

I wonder if the same plagued various European nations right before WW1.

Hell, the very problems in Africa and Middle East can be traced back to the actions of various colonial powers.

For instance, in the waning years of the British Empire the British colonials in what is today Iraq operated on a romantic view of British feudalism. And based on that they bypassed the urban administrations and reached out directly to the largely marginalized clan leaders, in the belief that they would be better at the job of running the place. What a spectacular result that produced...

And the Belgians basically seeded the continual troubles in Congo by making claims that one local group was better than another. This to set up a simmering conflict so that they would not turn on the Belgians...

I love how the Feds always bring child pornography into the argument when they need a boogeyman for their argument. Cash also works for fine for most corrupt enterprises. I hope they don't use that as an excuse to get rid of cash too. Besides, with only $35-45 million worth of bitcoins out there I doubt the currency is liquid enough for drug cartels to be able to use it very much.

BTW, is there a Bump app to pay local drug dealers in bitcoins? That's a jailbreak app waiting to happen.

So a mostly anonymous, cryptographically secure/trustable money supply is being used for "illicit" activities? You don't say. Maybe this report came from the Obvious Department. The same properties and activities apply to cash.

It's clear how Bitcoins retain value (scarcity), but it's not clear as to how they attain value. I read the wiki article and their FAQ and am still unsure. Is the equity of a single bitcoin tied in the processing required to "unlock" a block?? What sort of equity is that? It's not tangible at all.

Even paper money (at some point) was tangibly correlated to some kind of capital (gold, land, cattle), etc. Is Bitcoin's capital in power (electricity) consumed? Can someone please explain?

The lower bound for a bit coin is the electricity used to generate the bit coin. However, their current value far outstrips that, increased by sacristy. What really assigns a bit coin's value is the ability in the user's local market to purchase other goods and services. This value is set by the market and maintained by the bitcoin exchanges.

Unlike fiat currency, bitcoins have a very stable generation function meaning that they are free of government influence. For instance, the M2 monetary rate is up over 9%, meaning the Fed is printing money like crazy to paper over the economic crisis. This then works against anyone who saved anything. Contrast that to bit coins that will predictably generate coins, plus that function is terminal. Bitcoin has a fixed maximum number of coins in the economy. But unlike traditional currencies, you can divide bitcoins much, much smaller than 1/100th. (A penny) So when bitcoins run out but the bit coin economy grows, things will become "cheaper" for anyone holding bit older coins. Meanwhile bitcoins, while being divided more and more will still be able to fetch the same thing in local, real-world markets.

Ahh, thank you. Best explanation.

To the others, the "what the market will bear" argument applies to sustainability, not creation. Sure, money grows in value over time (or shrinks), but it starts with some non-zero value. Not too long ago, USD was tied to gold. Not too long before that, money was made of gold, or some other precious metal.